Speech by the Secretary-General of the IFSB at the WB – IFSB High-Level Seminar on Islamic Finance - Rethinking Finance for the SDGs: Islamic Finance and its Relevance
Date posted: 6 October 2016
||6 October 2016
|Event / Venue
||WB – IFSB High-Level Seminar on Islamic Finance – “Islamic Finance and the Sustainable Development Goals” | Washington DC, USA
||Mr Jaseem Ahmed, Secretary-General, IFSB
In my remarks today I will first identify the broader, if you like, existential challenge, which is the relevance and importance of rethinking the role of finance and ensuring for it a sense of higher social purpose. Given the shock of the global financial crisis, this rethinking, or reframing, is an essential pre-condition to restoring its legitimacy and refocusing finance towards serving the Sustainable Development Goals (SDGs). Second, I will go on to suggest how Islamic finance addresses the existential challenge, and the role it can play from this broader perspective in support of the SDGs. There are, needless to say, many challenges ahead, as well as a specific role for a standard setting body such as the IFSB, in navigating these challenges. I will touch upon these issues also, albeit briefly.
B. Finance and the SDGs – Reframing and Refocusing Finance
Ladies and Gentlemen,
Islamic finance is a new industry, one with a distinct focus.
A major contribution it has made in recent years is in helping us to rethink and reframe our understanding of the necessary links between finance, the real economy, and ethical conduct.
It is this aspect of Islamic finance, together with its rapid growth, and new financing instruments such as sukūk, that points towards the larger role that it can play in the world. They point in particular to the relevance of this event.
Our event today takes place against the context of a sense of urgency about the need for concerted action to achieve the social, economic and environmental goals that are contained in the SDGs.
We are all agreed that there is a need for scaling up investments to meet these goals, and that the financial system will have to find the resources, and indeed be a key instrument in delivering the investments needed. Islamic finance can certainly play a role in providing additional funding.
But it is also important to keep in mind that we don’t just need more finance, we also need a different type of finance.
Just a few years ago we were living in a world in crisis, and seemingly adrift.
The crisis is behind us today, and I hope also the sense of ethical drift.
We have emerged from a financial crisis precipitated by highly leveraged and under-capitalised financial institutions, acting imprudently and without regard to the consequences of their actions on individuals or on society at large.
There was widespread rigging in some financial markets, and aggressive policies were targeted at poor and un-informed consumers in the housing market in particular, the epicenter of the crisis.
The near-breakdown of the financial system that followed had adverse consequences for individuals who were impoverished, and for their communities and societies, which have yet to fully recover.
The conduct of financial institutions that precipitated the crisis was instrumental in a loss of confidence and trust in the financial system itself.
Since then, there have been major efforts in the principal crisis affected countries to restore to finance its solvency, as well as something of even greater value, its reputation.
There is strong and sustained policy pressure from regulators to stem the ethical drift I have referred to, and correct its course.
Increasingly there is the recognition that a higher meaning and purpose is necessary to give to finance its social legitimacy, and its instrumental value.
Considerable efforts have been made to ensure that the financial system is recapitalized after the global crisis, and additional efforts are being made so that it is reoriented, and above all refocused - towards serving the SDGs.
It is to be hoped that this will result in a reawakened identification with the higher goals that finance must serve.
C. The Relevance of Islamic Finance to the SDGs
This brings me to the relevance of Islamic finance, which was not implicated in the financial crisis, and its alignment with the SDGs, and the role it can play in this undertaking.
I would like to spend a few moments on this by discussing the core principles that drive Islamic finance.
I will draw on a joint publication by the IFSB and the Islamic Development Bank, Islamic Finance and Global Financial Stability 2010, where we present a concise and closely argued set of principles and overarching goals that define Islamic finance and which describe what we called the embedded governance of Islamic finance.
The relevant principles are of materiality and validity: the requirement that finance be related to the real economy, that high ethical conduct be observed; that profit and reward be proportional to the risks taken; and that prudence be ensured through the avoidance of gambling, speculation and excessive uncertainty.
The principles of materiality and validity in Islamic finance have contributed to its stability and its resilience through the global financial crisis. They have relevance towards the attainment of both a sustainable finance as well as a sustainable and green economy.
A resilient and sustainable finance must however also contribute to higher social goals, and here it is the overarching goals of Islamic finance that are relevant towards attaining an appropriate understanding of the role it is playing, and can be expected to play in the future, towards the attainment of the SDGs.
There are several overarching goals in Islamic finance, drawn from Islamic law, and of these I will only mention two that are most relevant.
First, the requirement that ethically conducted financial transactions, which support the real economy, should also be designed towards benefitting the wider community and achieving the goal of social justice and inclusion.
The second overarching principle is that of stewardship, which can be found in the various sources of Islamic law.
The concept of stewardship applies to the natural resources of the Earth, which can be enjoyed by human beings who must however recognize that they do not, in an ultimate sense, own the Earth and its natural resources, but must preserve and conserve them.
The concept of stewardship in Islamic law and in Islamic finance has a close affinity to the modern analytical view that says that each generation must leave behind for its successors a stock of natural resources that is undiminished in value.
The principles of Islamic finance that I have touched upon apply to the market-based, regulated, financial institutions to which the IFSB’s standards are directed.
But they also apply to other forms of finance such as those associated with zakat and waqf, which have historically been of immense value to Islamic communities across the world in meeting the goals of poverty reduction and social inclusion envisaged in Islamic law.
I am sure that one or more of our distinguished panelists will want to address this set of issues.
Ladies and Gentlemen:
The sustainable world envisaged by the SDGs is one that has ended poverty, reduced inequality, moved towards greater social justice, and in which adaptation is taking place to climate change through de-carbonisation.
This is a world that is consistent with, and congruent to, the higher goals for social justice, and stewardship of the Earth’s natural resources, that are contained in the embedded governance of Islamic finance.
The scale of investments needed to attain the SDGs means that we will need to harness every source of financing that is available. That means a major role for the MDBs such as the World Bank, the Islamic Development Bank and others, as well as for public and national contributions, and for the socially responsible investment industry.
But the principal contributions for the future will need to be drawn from the financial system itself, comprising both bank finance and finance from capital markets, accessed through both the conventional and Islamic financial systems.
D. The IFSB’s Mission in the Context of the SDGs
The IFSB’s mission to promote the stability and resilience of the Islamic financial system is well designed to support the attainment of the SDGs.
A stronger and more resilient Islamic financial system, with greater cross border connectivity, supporting the cross border investments needed to fund social and physical infrastructure will serve to promote stronger economic growth, as well as the goals for social and financial inclusion contained in the SDGs.
From this perspective, and from the perspective of the overarching goals of Islamic finance to which I have drawn your attention earlier, there is much that Islamic financial institutions can do to promote a more sustainable economy, and green investment and growth.
As we move towards the adoption of policies to reduce carbon emissions, through a carbon tax, for example, there will be increasing scope for Islamic finance to contribute though both bank finance and Green sukūk towards the raising of funds for the needed investments in retro-fitting, as well as for investments in new infrastructure assets that will help to de-carbonize our world.
New funding for the SDGs, a larger Islamic financial system, and more cross-border financing involving Islamic financial institutions from banking and capital markets sectors imply not only opportunities, but risks as well, and these will need to be appropriately disclosed and managed.
Islamic banks are well placed to undertake a range of funding for financial and social inclusion, and for infrastructure purposes. They are well capitalised, with a high proportion of their regulatory capital in the form of tier 1 common equity which is the most loss absorbent form of capital.
The IFSB is contributing to the stability of the Islamic banking system through its most recent standards that provide additional guiding principles for bank capital and liquidity management.
The accelerating adoption of these standards is contributing towards a more robust and resilient Islamic financing banking system, but more needs to be done to develop formal macroprudential frameworks that reduce domestic vulnerabilities to capital flows and provide a sustainable basis for finance and investment.
In addition to Islamic banks, Islamic capital markets (ICM) will have an increasingly important role to play in financing the SDGs.
In this regard, green Sukūk, and SRI Sukūk, have the potential to align the interests of global investors with Islamic finance and the SDGs.
This alignment will be aided by standardizing and harmonising principles for sukūk issuance, and for other capital market products, which will contribute to more transparent disclosures and listings.
To support this goal, the IFSB is devoting greater effort and attention to the key issue of creating depth and breadth of cross border Islamic financial markets, and in particular Islamic capital markets and sukūk by facilitating the issuance and adoption of common international standards for prudential safeguards and risk management capabilities in ICM.
We are currently in the midst of the preparation of a standard for transparency and market disclosure that will provide an international benchmark for the regulation and supervision of ICM products, including for sukūk instruments.
We have also launched a standard for the preparation of Core Principles for Islamic Capital Markets. These standards will contribute towards a common set of international standards for Sukūk and ICM and, will strengthen the basis for greater cross border flows.
Ladies and Gentlemen,
A sustainable world will require a new financial system, one that is substantially different from the one that led us into the global financial crisis.
It will be a more resilient and better capitalised and less leveraged financial system.
This financial system will be one that is based on high ethical standards for conduct, in which value is placed not only on meeting fiduciary duties to shareholders, but also on the wider consequences for the world at large.
The financial system that we need for the SDGs is well served and strengthened by the presence of a robust and resilient Islamic financial services industry, one that embodies the ethical standards and wider concerns for social justice and inclusion drawn from its guiding principles.
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